October 3rd, 2010 10:34 PM by Eric Fang
As we stated last week, many analysts have been feeling that Quantitative Easing(QE2) was very likely, if we continue to see weak economic reports. But comments made by a number of Fed officials throughout the week indicated that QE2 may still be up in the air.
But what would another round of Quantitative Easing mean to Bonds and home loan rates?
Let’s break it down into four important aspects: (1) When would it happen? (2) How much money would it involve? (3) Why is this being contemplated? (4) And what does it mean to home loan rates?
First, whether QE2 happens will be dependent upon the upcoming data releases. Many experts agree that if the Fed does make a move, it will most likely happen at the next Fed meeting, which is scheduled for November 3rd.
Second, the question of "how much" is still up in the air. As stated above, New York Fed President William Dudley gave an example of a $500 Billion purchase - but estimates are all over the board at this point, from $200 Billion to $2 Trillion.
Third, a large round of QE2 would almost assuredly hurt theUS Dollar. And by hurting the US Dollar, our exports become more affordable abroad, as well as making imports appear relatively more expensive. This helps large multi-national companies, which have a large influence on the economy, as well as the major Stock market indices. This could be the goal of the Fed. Ahh...but you can't outright say you are trying to weaken your currency. After all - haven't many members of Congress and the Administration been bashing China for currency manipulation?
So, What would QE2 mean to Bonds and home loan rates?
If the Fed does go through with another round of Quantitative Easing, Bond prices should - initially - improve for two reasons. First, Bonds would likely improve due to the soft economic data causing QE2. Second, Bonds would improve simply because the announcement of QE2 would include large Bond purchases. The key word is "initially." That’s because, even though Bonds would initially improve, the eventual softening of the Dollar, rising commodity prices, and rise in Stock prices could become a drag on Bonds, which would negatively impact home loan rates.
So let's not jump to any conclusion yet? Did I the rate will go lower initially and will go up a little bit later after the Nov Fed Meeting? Let's wait and see.